The Cost of Living Crisis: What is it and what could you do about it?

17 Jun 2022

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With rising costs hitting us from various angles, you may be concerned about the cost of living crisis that we’re currently facing in the UK and the effect this might have on your finances.

Keep reading to find out why these increases are happening and if there is anything you could do to help make your money go further in 2022 and beyond.


What is the cost of living crisis?

The ‘cost of living crisis’ refers to the squeeze on our finances that a vast number of UK households are currently feeling. With the costs of various products and services skyrocketing since the beginning of 2022 (while many people’s wages have remained at the same level), a lot of us have seen our disposable income reduce and the value of our savings fall.

This is due to the fact that if the interest rate you’re getting on your savings from your bank or building society falls below the rate of inflation, your money will lose value in real terms as it won’t be growing at the same rate as the price of basic goods and services. And the more expensive that everyday goods and services cost due to rising inflation, the less you’ll be able to buy with your money.

But why is this happening? There are countless factors that are having an impact, including record high inflation (with it reaching a 40-year high in May 2022), which has pushed up the price of groceries and other basic goods and services, as well as other rising costs in the form of fuel, and gas and energy bills. In fact, gas and energy bills are forecast to rise even further in October 2022 due to the increase in the energy price cap, with it now being predicted that they could rise by 46%.

On top of this, many are also being confronted with recent tax hikes and stagnated wages.

We’ll go into this in more detail below.


What are the factors increasing the cost of living?

Some of the main factors impacting the cost of living are as follows:


Record high inflation

  • UK inflation hit a 40-year high in 2022, with it reaching 9% in May – and the Bank of England has already forecast that this will likely reach 10% by Q4 2022.
  • ‘Inflation’ measures the rate at which prices for goods and services (such as food and train fares) increase, which is a direct indicator of our purchasing power (aka, what you get for your money).
  • Andrew Bailey, the governor of the Bank of England has also warned of an ‘apocalyptic’ impact on food prices this year due to Russia’s invasion of Ukraine.


Unprecedented energy prices

  • High energy prices have been a major factor in the cost of living crisis with the price cap already rising in 2021 and dozens of suppliers going bust. Prices have continued to creep up in 2022 and they’re predicated to go up even further towards the end of this year, with Russia’s invasion of Ukraine exposing Europe’s over-reliance on Russian gas.
  • The energy price cap, set in place to protect consumers, increased by £693 (or 54%) in April this year, with a further increase being forecast in October. The price cap indicates the cost at which wholesale price changes can be charged back to the consumer.
  • In May 2022, the UK Government announced that they will be giving all UK households a £400 discount to help with their energy bills from October 2022, and they also have plans to impose a temporary windfall tax on energy companies. However, a number of energy firms have already reported record profits in recent quarters and there may also be concerns that these measures from the government won’t be enough to have much of an impact.


Health and social care levy

  • The Health and Social Care levy is an additional tax of 1.25% in the form of increased National Insurance (NI) contributions, which has recently come into effect in the UK.
  • However, it’s worth bearing in mind that the threshold before you start paying NI contributions will increase to £12,570 in July, which means that the amount being taken out of your paycheck month is likely to decrease for many people.


How do people feel about their finances?

We recently ran a survey of 1,432 respondents via our Instagram page to find out how people feel about their finances. We also wanted to see how their appetite for investing might have been impacted in light of these recent economic conditions.

According to our survey, only 19% of respondents felt ‘very’ confident when it comes to their finances, while almost the same amount (18%) said that they didn’t feel confident at all. However, the majority of those who responded said they fell somewhere in the middle, with them feeling ‘reasonably’ confident.

The majority of those surveyed, however, did say that their confidence with money had improved since the pandemic began, which we think is great to see. In fact, 62% said that they now feel more confident compared to the start of the pandemic.

Although it’s safe to assume that our audience are actively interested in finance, so they may be more clued up about money matters than the average person, the results of our polls do tell us that there is still some work to be done when it comes to increasing people’s financial literacy. This is backed up by the 2021 Financial Wellbeing Survey by the Money and Pensions service which concluded that 45% of UK adults don’t feel confident managing their money.

When it came to their saving and investing habits, of those we surveyed, 68% said that they had more than £5,000 built up in savings. 36% also reported having over £5,000 invested.

However, despite this, 36% of respondents said that they don’t currently invest, with 46% admitting that they don’t feel confident at all when it comes to investing.


So, what could you do to tackle the increases in the cost of living?

As everyone’s disposable income is being squeezed more and more, now could be a good time to take stock of where your finances are to help you be as prepared as you can be for the possibility of further increases.

Your first priority could be to make sure that you have enough income to meet your basic needs (such as bills and food). In some cases, you might need to split your needs into essentials and nice-to-haves.

For example, having dinner out every week is great but we all know that it’s cheaper to eat at home – so if push comes to shove this would likely be an expense that gets dropped.

It's also recommended to have at least 3 months’ worth of expenses saved in an emergency fund if you can. So, if you are lucky enough to be able to put some money away at the end of each month, then you might want to consider increasing your savings and creating an appropriate buffer to help deal with any further price rises or unexpected costs you might face in future – such as a broken-down car or a leaking roof.

And if you do have money left over after building a strong emergency savings fund, then you may want to consider the next step to making your money go further – which is investing. With investing, your returns aren’t tied to any fixed interest rates, which means you could give your money an opportunity to grow further and help it to work harder for you.

But if you feel like you haven’t got the time or expertise start, then you’re not alone - 46% of those who responded to our survey said they didn’t feel confident when it came to investing. In this case, why not consider letting someone else do the hard work of choosing, selling, and managing your investments for you?

Wealthify is an investment service that makes it simple and affordable to invest, starting with as little as £1, and their team of experts will build your perfect Investment Plan and take care of all the decisions for you – such as what investments to buy and sell. All you need to do is pick your Plan type (such as a Stocks and Shares ISA or a General Investment Account), decide how much you want to invest and how often, then choose a risk level that suits you.

Their experts will build you a fully diversified investment portfolio based on your chosen risk level and stay on top of economic and market trends, news, and global political affairs that impact the markets, which allows them to make important decisions to help keep your Plan on track. Find out more about Wealthify and how easy it could be to get started.

As with all investing, your money is at risk. The value of your portfolio can go down as well as up and you could get back less than you put in.

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Wealthify doesn’t offer financial advice. You should seek financial advice if you’re unsure about investing.

Past performance is not a reliable indicator of future results.